Founders are outsourcing more tasks to Latin America from the West than ever before.
With the increase in the availability of capable native human capital, proximity as well as an abundance of affordable labor compared to Europe, LATAM is gradually replacing Eastern Europe as the go-to destination for corporate outsourcing in recent years but much of this change still goes unnoticed.
In this article unlike in the previous one in this blog, we’ll take a long look at outsourcing in general, nearshore outsourcing in particular, and some of the factors that are propelling South America to become the major destination to outsource for businesses in North America and Europe.
A brief introduction to outsourcing
In the previous articles I mentioned earlier and in the comprehensive guide on outsourcing on our website that I recommend you take a look at, we defined outsourcing as an arrangement whereby organizations hire an external software agency to build parts or all of their software projects.
By outsourcing, companies choose to strategically hand their processes to a third-party company vetted to be qualified to handle them in order to focus on other vital issues.
The reason companies do this vary but some include:
- Access to talents
- To reduce operating cost
- To edge competition
In the past, we saw a huge trend to outsource to Eastern Europe with countries like Ukraine and Sweden typically taking the largest share of the outsourcing capital inflow to the region but at the moment things have started to change.
Buyer companies in the outsourcing marketplace are shifting focus to outsourcing to locations near their country of origin due to several factors; one of which is the ongoing geopolitical issues in Europe, Asia, and other places around the world.
South America is a booming destination
to outsource to.
Why founders are choosing to nearshore
Just like the geopolitical issue, when you think about some of the reasons we sparsely mentioned in the opening paragraphs of this article on why outsourcing to Latin America is becoming a trending topic around the world such as the abundance of affordable labor, you’ll realize the change in focus of these buyer companies —especially from North America and Western Europe, is predictable.
Aside from some of the mentioned benefits of nearshore outsourcing that we would later explore in detail, there’s also the familiarity with the outsourcing destination’s culture that’s fuelling the shift to outsourcing to South America.
For the record and for the benefit of readers who are unfamiliar with the concept of nearshore outsourcing, we’ve talked about it at length on our blog website so I encourage you to check out titles relating to it in the blog for deeper knowledge.
Nevertheless, the most important thing you need to know is that nearshore outsourcing is a type of outsourcing where companies only outsource their tasks — whether it be software development tasks, administrative or other IT tasks, to service provider companies within their region or in close proximity to their region.
Again, the reason why companies choose nearshore outsourcing over traditional outsourcing —where they hire outsourcing agencies from anywhere in the world, varies but it’s mainly to serve as a buffer for geopolitical tensions that could make evacuating their work from troubled regions hard as it is in the classical type of outsourcing.
With nearshore outsourcing, companies are likely to be familiar with the culture as well as the political situation of possible outsourcing destinations within their region so there’s a higher likelihood of safety from disruptions that could throw business operations into chaos like in traditional outsourcing.
The Latin America Subcontinent
Talking about Latin America: the growing half of the Americas comprises countries whose culture, language, and heritage are largely Hispanic with mild Western influence.
GDP growth projection for LATAM
for 2021, 2022, 2023, 2024. Source.
Countries on the subcontinent are considered to be largely stable politically which is why there is a growing trend of outsourcing to the region.
I’ve sparsely mentioned several reasons Latin America is becoming the preferred nearshoring destination for North American companies throughout this article and I promise to discuss them in detail later, however, the core reason why outsourcing to LATAM is growing is because of the progress the region has made in terms of political stability and the continuing efforts to equip the region’s population with IT skills.
The Index of Political Stability and Absence of Violence/Terrorism
has improved from 2021 in the picture. Source.
In fact, South America’s only challenge —much like the rest of the world, the IMF believes, is managing core inflation which could result in business disruption from people taking to the street to protest if it goes out of hand.
Thankfully countries in the region are doing a good job managing it according to the IMF who also noted that inflation receded in many LATAM countries last year due to the efforts of central banks in the region as well as lower global prices of food and energy.
As a matter of fact, Latin America’s economies held up well last year despite the shocks from the surprise Russian invasion of Ukraine and global interest rate hikes.
The IMF reported that In 2022, despite the global geopolitical issue, Latin America’s economy expanded by nearly 4 percent and that employment as well as the service sector rebounded from the damage caused by the global pandemic.
Uruguay is the knight in shining armor
Because Latin America covers a really large area, you may find it hard to decide which country to outsource to as a business owner looking to do so.
You may even be tempted to just go with the bigger countries such as Brazil or Argentina.
I will say this regarding this common dilemma: whenever you’re in doubt look at the stats!
The statistics from the infographics posted above undoubtedly show how well Uruguay is performing in comparison to other LATAM states despite being a small country.
As the smallest Spanish-speaking territory in the region, Uruguay is fast emerging as the place to outsource to in the whole of South America.
If you’re looking to outsource to LATAM from the US, you’ll love Uruguay! Since we are only an hour ahead of the US time zone.
Companies interested in nearshoring to Uruguay are spoiled with choices and all kinds of bonus perks that include vast IT infrastructure, long-standing economic and political stability, as well as some of the best IT talents with English proficiency that South America has to offer.
Why North American companies are choosing to outsource to LATAM
Having pointed out how well Uruguay is doing, now let’s take a look at the list of what I consider to be the reasons why South America as a whole is booming as the destination for outsourcing.
Ongoing geopolitical issues around the world
This is undoubtedly the most significant determinant factor for the reason why companies are looking elsewhere to outsource.
The geopolitical tension between Russia and NATO-backed Ukraine caused the disruption of business activities in one of Europe’s largest outsourcing destinations and has hastened businesses’ exit from the region.
To put it in perspective, Ukraine before the start of the war earned a total of about $1B from outsourcing, and that dropped to less than $800 million in 2022.
Long-standing political stability
Although what hastened businesses’ exit from Eastern Europe was the war, what solidified their interest to increasingly outsource to South America is the relative peace and stability of the region’s polity in recent decades.
This is particularly true for the Cono Sur region of Latin America that consists of Argentina, Brazil, Chile, and Uruguay which have enjoyed longer periods of democracy and a relatively high level of political stability than other parts of the continent.
At the moment, the entire region’s governments are preoccupied with achieving the long overdue goal of working together to form an influential bloc that’s projected to become the fifth-largest economy in the world which further guarantees that the current peace in the region will last longer into the future.
Familiarity with LATAMs culture
Perhaps the most overlooked reason why North American companies are choosing to outsource to the South is the familiarity with the culture that exists between the two regions.
The shared history of Spanish legacy and population means working with outsourcing service providers from the region is more intuitive and easy as a founder from any of the countries in the North.
The abundance of capable native human capital
Together with the relative peace and stability that the region enjoys which is driving companies to consider Latin America as a destination for outsourcing, the core reason why the region seems interesting to businesses is the increasing number of its population that’s becoming skilled in the various IT sectors.
According to figures from the World Bank, the entire region represents one of the fastest-growing regions in the world when it comes to the number of a region’s population that possess sufficient digital skills (e.g., computer skills, basic coding, digital reading) as of 2019.
Proximity
This list wouldn’t be honest if we don’t talk about the proximity that exists between buyer companies and outsourcing service providers in Latin America.
We’ve touched on one reason why this matters in a paragraph above — because companies can quickly evacuate their work in case of serious tension.
Another reason why proximity is so important is that it means that North American companies don’t have to worry about the large difference in time zones.
For instance, Uruguay is only an hour ahead of the US which means founders can actively collaborate with outsourcing agencies on daily tasks.
Affordable labor
Labor cost is another reason outsourcing is shifting to South America and why you should consider outsourcing here too.
There have been several studies that show that costs are similar to or cheaper than those of previously popular outsourcing locations like India and Ukraine.
All in all, this entire article represents an overview of the changes to the outsourcing marketplace and the points listed above are some of the reasons these changes are occurring.
I hope that this piece serves as a guide that helps you make an informed decision on where to outsource and why you should think about nearshore outsourcing.
If you find this article helpful, you’ll most likely find our founder’s guide to software outsourcing helpful too.
Also, take a look at other helpful articles about outsourcing on our blog website or reach out to our team for consultation for free if you’re presently in search of an outsourcing service provider.